Framework and Approach Powerlink - Regulatory control period commencing 1 July 2022 - Powerlink Queensland
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Framework and Approach
Powerlink
Regulatory control period
commencing 1 July 2022
July 2020
2022–27© Commonwealth of Australia 2020
This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material
contained within this work is provided under a Creative Commons Attributions 3.0 Australia
licence, with the exception of:
the Commonwealth Coat of Arms
the ACCC and AER logos
any illustration, diagram, photograph or graphic over which the Australian Competition and
Consumer Commission does not hold copyright, but which may be part of or contained within
this publication. The details of the relevant licence conditions are available on the Creative
Commons website, as is the full legal code for the CC BY 3.0 AU licence.
Requests and inquiries concerning reproduction and rights should be addressed to the:
Director, Corporate Communications,
Australian Competition and Consumer Commission,
GPO Box 3131,
Canberra ACT 2601
or publishing.unit@accc.gov.au.
Inquiries about this publication should be addressed to:
Australian Energy Regulator
GPO Box 520
Melbourne Vic 3001
Tel: 1300 585 165
Email: AERInquiry@aer.gov.au
AER reference: 65444
Framework and approach – Powerlink transmission determination 2022–27 1About the framework and approach paper
The Australian Energy Regulator (AER) is responsible for the economic regulation of electricity
transmission and distribution services in Australia’s National Electricity Market (NEM). We are an
independent statutory authority established by the Australian Government. Our relevant powers
and functions are set out in the National Electricity Law (NEL) and Rules (NER).
Developing a framework and approach (F&A) paper is the first step in the process to determine
efficient prices for Powerlink’s electricity transmission services business in Queensland. It sets
out our proposed approach to the economic regulation of Powerlink’s revenues for the
forthcoming 2022–27 regulatory control period, from 1 July 2022 to 30 June 2027 (2022–27
period), as well as our proposed application of incentive schemes.1 It also facilitates early
consultation with consumers and other stakeholders, and assists Powerlink in preparing its
expenditure proposal.
Powerlink is a licensed, regulated operator of the monopoly high voltage electricity transmission
network in Queensland. The network comprises the poles, wires and transformers used for
transporting high voltage electricity from remote generators to population centres. Powerlink
designs, constructs, operates and maintains the transmission network for Queensland electricity
consumers. Powerlink’s current 2017–22 regulatory control period concludes on 30 June 2022.
Previous consultation – preliminary F&A paper
We consulted previously on a preliminary F&A paper for Powerlink and received two submissions
(see ‘Submissions on preliminary F&A paper’ later in this paper).2 The preliminary F&A paper set
out our proposed approach for application of the following matters for the 2022–27 period:
service target performance incentive scheme (STPIS)
efficiency benefit sharing scheme (EBSS)
capital expenditure sharing scheme (CESS)
expenditure forecast assessment guidelines
whether depreciation will be based on forecast or actual capital expenditure (capex) in
updating the regulatory asset base (RAB).
Next steps
Following the release of this final F&A paper, Powerlink must submit its 2022–27 revenue
proposal by 31 January 2021. Table 1 summarises the transmission determination process.
1 In accordance with clauses 6A.10.1A(a)(i) and (e) of the NER, our F&A paper for Powerlink for the 2022–27 regulatory control
period must be published by 31 July 2020.
2
The closing date for stakeholder submissions on our preliminary F&A paper for Powerlink was 30 March 2020. Submissions were
received from Powerlink and the AER’s Consumer Challenge Panel (CCP23).
Framework and approach – Powerlink transmission determination 2022–27 2Table 1 Powerlink’s 2022–27 transmission determination process
Step Date
AER publishes final F&A for Powerlink By 31 July 2020
Powerlink submits regulatory proposal to the AER By 31 January 2021
AER publishes issues paper March 2021*
AER holds public forum April 2021*
Submissions due on regulatory proposal May 2021*
AER publishes draft decision September 2021*
AER holds a predetermination conference October 2021*
Powerlink submits revised regulatory proposal to the AER November 2021*
Submissions due on draft decision and revised regulatory proposal January 2022*
AER publishes final decision 30 April 2022
Source: NER, Chapter 6A, Part E.
Notes: * The dates provided are based on the AER receiving compliant proposals. These dates may alter if we
receive non-compliant proposals. The NER also does not provide specific timeframes in relation to
publishing a draft decision.
Framework and approach – Powerlink transmission determination 2022–27 3Contents
About the framework and approach paper....................................................................... 2
Contents ............................................................................................................................. 4
1 Overview ...................................................................................................................... 5
1.1 F&A paper – summary of final outcomes-------------------------------------------------- 5
1.2 Preliminary F&A paper – submissions received ---------------------------------------- 7
2 Service target performance incentive scheme .......................................................... 9
2.1 AER’s position ----------------------------------------------------------------------------------- 10
2.2 AER’s assessment approach ---------------------------------------------------------------- 10
2.3 Reasons for AER’s position ----------------------------------------------------------------- 11
3 Efficiency benefit sharing scheme ........................................................................... 13
3.1 AER’s position ----------------------------------------------------------------------------------- 13
3.2 AER’s assessment approach ---------------------------------------------------------------- 13
3.3 Reasons for AER’s position ----------------------------------------------------------------- 14
4 Capital expenditure sharing scheme ....................................................................... 15
4.1 AER’s position ----------------------------------------------------------------------------------- 16
4.2 AER’s assessment approach ---------------------------------------------------------------- 16
4.3 Reasons for AER’s position ----------------------------------------------------------------- 16
5 Small-scale incentive scheme .................................................................................. 17
6 Demand management incentive scheme / innovation allowance mechanism ...... 17
7 Expenditure forecast assessment guideline ........................................................... 18
8 Depreciation .............................................................................................................. 19
8.1 AER position -------------------------------------------------------------------------------------- 20
8.2 AER’s assessment approach ---------------------------------------------------------------- 20
8.3 Reasons for AER’s position ----------------------------------------------------------------- 21
Shortened forms .............................................................................................................. 22
Framework and approach – Powerlink transmission determination 2022–27 41 Overview
The purpose of the F&A is to provide Powerlink and interested stakeholders with an indication of
our likely position on matters that Powerlink is required to address in its 2022–27 revenue
proposal. The nature of the F&A is such that it will provide a degree of regulatory predictability.
This F&A paper sets out how we propose to apply a range of incentive schemes and other
guidelines to Powerlink, as well as our approach to calculating depreciation. The positions we set
out in this F&A paper are not binding on the AER or Powerlink.3 This means that during the
determination process, it is open to us to change our position, and for Powerlink to propose a
different position, on matters set out in the F&A. If our position changes from what is set out in
this F&A paper, we will provide clear reasons.
Incentive schemes encourage transmission network service providers (TNSPs) to manage their
respective businesses in a safe and reliable manner that benefits the long term interests of
consumers. Such schemes also provide TNSPs with incentives to spend efficiently and to meet
or exceed service quality/reliability targets. In some instances, TNSPs may incur a financial
penalty if they fail to meet set targets. The overall objectives of incentive schemes are to:
encourage appropriate levels of service quality
maintain network reliability as appropriate
incentivise TNSPs to spend efficiently on capital and operating expenditure (capex/opex)
share efficiency gains and losses between TNSPs and consumers
incentivise TNSPs to consider economically efficient alternatives to augmenting their
networks.
We summarise the specific incentive schemes below, and also provide an overview of our
expenditure forecast assessment guideline and approach to calculating depreciation.
1.1 F&A paper – summary of final outcomes
In relation to Powerlink’s forthcoming 2022–27 regulatory control period, this section summarises
the specific incentive schemes and provides an overview of our expenditure forecast assessment
guideline and approach to calculating depreciation.
Service target performance incentive scheme
The service target performance incentive scheme (STPIS) provides a financial incentive to
TNSPs to maintain and improve service performance. The STPIS aims to safeguard service
quality for customers that may otherwise be affected as TNSPs seek out cost efficiencies.
Our position is to apply version 5 of the STPIS to Powerlink for the 2022–27 regulatory control
period.4
3
NER, cl. 6A.10.1A(f).
4
AER, Electricity Transmission network service target performance incentive scheme, version 5 (corrected), October 2015. STPIS
version 5 is available at https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-reviews/service-target-
performance-incentive-scheme-version-5-september-2015-amendment.
Framework and approach – Powerlink transmission determination 2022–27 5Efficiency benefit sharing scheme
The efficiency benefit sharing scheme (EBSS) aims to provide a continuous incentive for TNSPs
to pursue efficiency improvements in opex, and provide for a fair sharing of these efficiencies
between TNSPs and network users. Consumers benefit from improved efficiencies through lower
regulated prices in the future.
We propose to apply version 2 of the EBSS to Powerlink for the 2022–27 period.5
Capital expenditure sharing scheme
The capital expenditure sharing scheme (CESS) provides financial rewards to TNSPs whose
capex becomes more efficient, and financial penalties for TNSPs whose capex become less
efficient. Consumers benefit from improved efficiency through lower regulated prices in the
future.
We propose to apply version 1 of the CESS to Powerlink for the 2022–27 period.6
Small-scale incentive scheme
On 21 July 2020, we published an electricity distribution small-scale incentive scheme (SSIS)7 for
customer service, referred to as the ‘customer service incentive scheme’ (CSIS).8 The scheme
would reward electricity distribution network service providers (DNSPs) for improving their
customer service, or penalise them if service deteriorates.
Powerlink has not proposed a detailed transmission incentive scheme design developed in
conjunction with its customers. As such, we do not propose to apply a SSIS to Powerlink for the
2022–27 period.
Demand management incentive scheme / innovation allowance mechanism
The ‘demand management incentive scheme’ (DMIS) provides the service operator with financial
payments to implement efficient non-network options which are expected to lower costs to
consumers. This compares to the ‘demand management innovation allowance mechanism’
(DMIAM) which provides the service provider with funding to research and develop demand
management projects that have the potential to reduce long term network costs.
On 5 December 2019, the Australian Energy Market Commission (AEMC) published its final
determination for a rule change to apply the DMIAM – but not the DMIS – to TNSPs.9 As a result,
the AER must develop and publish the first transmission DMIAM by 31 March 2021.10 Due to the
5
AER, Efficiency benefit sharing scheme, 29 November 2013. EBSS version 2 is available at https://www.aer.gov.au/networks-
pipelines/guidelines-schemes-models-reviews/efficiency-benefit-sharing-scheme-ebss-%E2%80%93-november-2013.
6
AER, Capital expenditure incentive guideline for electricity network service providers, November 2013. CESS version 1 is
available at https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-reviews/expenditure-incentives-guideline-
2013/final-decision.
7
NER, cl. 6A.7.5.
8
AER, Explanatory statement – customer service incentive scheme, 21 July 2020.
9
AEMC, Demand management incentive scheme and innovation allowance for TNSPs, Rule determination, December 2019.
10
NER, cl. 11.118.2.
Framework and approach – Powerlink transmission determination 2022–27 6COVID-19 interruption, we expect to finalise the transmission DMIAM by 30 June 2021 following
stakeholder consultation on a draft guideline.11
While the transmission DMIAM will be finalised on a date occurring after Powerlink submits its
2022–27 initial revenue proposal, Powerlink will have an opportunity to fully reflect the finalised
transmission DMIAM in its revised revenue proposal. At this stage, we expect to apply a DMIAM
to Powerlink for the 2022–27 period in our final determination.
Expenditure forecast assessment guidelines
The expenditure forecast assessment guideline is based on a nationally consistent reporting
framework allowing us to compare the relative efficiencies of TNSPs and decide on efficient
expenditure allowances. The guideline outlines a suite of assessment/analytical tools and
techniques to assist our review of Powerlink’s revenue proposal.
We propose to apply the guideline, including the information requirements, to Powerlink for the
2022–27 period.12
Depreciation
As part of the ‘roll forward’ methodology, when a TNSP’s RAB is updated from forecast capex to
actual capex at the end of a regulatory control period, it is also adjusted for depreciation. The
depreciation we use to roll forward the RAB can be based on either actual capex incurred during
the period, or the capex allowance forecast at the start of the period. The choice of depreciation
approach is one part of the overall capex incentive framework.
We propose to use forecast depreciation to establish the RAB for Powerlink’s subsequent
regulatory control period (2027–32), starting 1 July 2027.
1.2 Preliminary F&A paper – submissions received
We consulted previously on a preliminary F&A paper for Powerlink that we published on
21 February 2020. In response, we received two submissions from stakeholders – one from
Powerlink, and another from the AER’s Consumer Challenge Panel (CCP23).13
Powerlink’s submission
Overall, with the exception of the STPIS, Powerlink agrees with the AER’s approach to all of the
matters set out in the preliminary F&A Paper.14
STPIS
Powerlink submitted that version 5 of the STPIS is no longer providing appropriate incentives and
should be reviewed prior to the commencement of Powerlink’s next regulatory control period.
Powerlink’s primary reason for requesting the review is to ensure that the market impact
11
As indicated in the, Joint market body prioritisation framework – COVID 19, released by the AER, AEMC and AEMO on
19 May 2020, https://www.aer.gov.au/publications/corporate-documents/joint-market-body-prioritisation-framework-covid-19.
12
We are continuously improving the economic benchmarking techniques that are captured in our guideline. This includes
reviewing and refining our analysis of operating environment factors. See section 7 for more detail.
13
The closing date for stakeholder submissions on our preliminary F&A paper for Powerlink was 30 March 2020.
14
Powerlink, Submission on Powerlink Preliminary Framework & Approach, 30 March 2020.
Framework and approach – Powerlink transmission determination 2022–27 7component (MIC) targets applied in the 2022–27 period appropriately capture significant impacts
to the network that have been experienced in recent years due to the integration of inverter
connected technology.15
Powerlink first noted its concerns with the current version of the STPIS in its 31 October 2019
request to us to develop a replacement F&A to apply to the Powerlink transmission determination
process for the 2022–27 period. Powerlink’s request is supported by other transmission network
service providers through Energy Networks Australia (ENA).16
As set out in section 2, our position is to apply version 5 of the STPIS to Powerlink for the 2022–
27 period.
Regulatory sandbox
In its submission, Powerlink discussed applying ‘regulatory sandbox’ arrangements as proposed
by the AEMC.
Regulatory sandboxing refers to the framework within which participants can test innovative
concepts in the market under relaxed regulatory requirements at a smaller scale, on a
time-limited basis and within appropriate safeguards in place.17
As noted in our submission to the AEMC on regulatory sandboxing: “We will work collaboratively
with stakeholders to develop a sandbox waiver process that is focussed on supporting a better
process for reform in the long-term interests of customers.”18
COVID-19 impacts
In its submission, Powerlink raised concerns regarding the uncertainty of COVID-19 impacts.
We recognise that COVID-19 may have an impact on Powerlink’s business operations and costs.
At this stage, feedback from network businesses is mixed and suggests that, while it is too early
to determine COVID-19 impacts on businesses’ operations, the overall impacts may not be
material in terms of costs. The network businesses have begun to gather data to aid any future
impact assessment. Until all the data is available, we cannot determine the extent and direction
of COVID-19 impacts on network businesses, or whether the impacts are material.
As set out in our 27 March 2020 Statement of Expectations on energy businesses, energy is an
essential service which has an important role to play in protecting and supporting businesses and
the community through the COVID-19 pandemic and our recovery.19 Our Statement also
recognises that COVID-19 may add to the risks and costs facing energy businesses.
Consumer Challenge Panel’s (CCP23) submission
STPIS
CCP23 acknowledges Powerlink’s 2022–27 regulatory proposal is being developed in a period of
significant change and uncertainty.20 As CCP23 notes, should the AER decide to review the
15
Powerlink, Submission on Powerlink Preliminary Framework & Approach, 30 March 2020.
16
In AusNet Services’ request for a replacement F&A for the 2022–27 period, it also raised concerns regarding the ability of STPIS
version 5 to provide appropriate incentives in the current environment of increasing investment in renewable generation.
17
AEMC, Regulatory sandboxes – Advice to COAG Energy Council on rule drafting, Final Report, 26 March 2020, p. i.
18
AER, Regulatory sandbox arrangements to support proof of concept trials (submission to AEMC), 20 February 2020, p. 1.
19
AER, Statement of Expectations of energy businesses: Protecting consumers and the energy market during COVID-19,
27 March 2020.
20
CCP23, CCP23 response to preliminary framework and approach, 30 March 2020.
Framework and approach – Powerlink transmission determination 2022–27 8STPIS, this would occur under a separate AER process to the F&A process, and any potential
changes to the STPIS would require an extended stakeholder consultation process.
CCP23 recognises that there are new issues that will face most of the TNSPs in ensuring a
secure and reliable network as a result of the rapid expansion of large scale solar and wind
developments. While CCP23 does not see this as a sufficient reason, in principle, to propose an
alternative to the application of STPIS version 5, they do ask the AER to consider carefully any
options proposed by Powerlink that are within the overall framework of STPIS version 5.
As noted in our response to Powerlink’s submission, our position is to apply version 5 of the
STPIS to Powerlink for the 2022–27 period. Further information is set out in section 2.
Integrated System Plan (ISP)
CCP23 notes the Australian Energy Market Operator’s (AEMO) ISP has identified several
significant projects that will be progressively rolled out and these may have significant impacts on
Powerlink’s expenditure and performance requirements for its 2022–27 revenue control period.
CCP23 notes that Powerlink currently regards most of these as ‘contingent’ projects and not part
of its ex-ante forecasts. Moreover, the overall cost-benefit analysis for each of these projects is
being assessed via the ISP process rather than through the standard regulatory cost-benefit /
efficiency test processes. CCP23 considers it is possible that this will provide a challenge to
assessing the efficiency of some of the forecast expenditures and the operation of the incentive
schemes.
CCP23 asks the AER to consider specifically, or at least acknowledge, the potential impact of
these developments in the final F&A.
We recognise that Powerlink’s 2022–27 revenue proposal will be made in the context of the new
rules around the actionable ISP. This framework retains a rigorous cost-benefit analysis, applied
by AEMO when developing the ISP and through application of the regulatory investment test for
transmission (RIT-T) to actionable projects. We will continue to engage with Powerlink
throughout the revenue determination process to understand the interplay between Powerlink’s
revenue proposal and the ISP.
2 Service target performance incentive scheme
This section sets out our proposed approach and reasons on how we intend to apply the STPIS
to Powerlink in the 2022–27 regulatory control period.21
The AER creates, administers and maintains the STPIS in accordance with the requirements of
the NER.22 The STPIS is part of an incentive based regulation structure we use across all the
electricity transmission networks we regulate.
The purpose of the STPIS is to provide incentives to TNSPs to provide greater transmission
network reliability when network users place greatest value on reliability, and improve and
maintain the reliability of the elements of the transmission network most important to determining
spot prices.23
21
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015.
22
NER, cl. 6A.7.4(a).
23
NER, cl. 6A.7.4(b)(1).
Framework and approach – Powerlink transmission determination 2022–27 9In developing the STPIS, we had regard to the requirements of the NER. Under an incentive
based regulation framework, TNSPs have an incentive to reduce costs. Cost reductions are
beneficial to TNSPs and customers where service performance is maintained or improved.
However, cost efficiencies achieved at the expense of service performance standards are not
desirable.
2.1 AER’s position
Our position is to apply version 5 of the STPIS to Powerlink for the 2022–27 regulatory control
period.
2.2 AER’s assessment approach
The STPIS works as part of the ‘building block’ determination.24 As part of a revenue
determination, we make a decision on the application of the STPIS to a TNSP for the regulatory
control period as well as the values associated with the applicable STPIS parameters.25 In each
regulatory year, the TNSP’s maximum allowed revenue (MAR) is adjusted based on its
performance against the STPIS parameters in the previous calendar year.
We will apply version 5 of the STPIS to Powerlink as follows:
the parameters for each service component (SC) and the maximum revenue increment or
decrement that Powerlink can receive for a given level of performance will be those
prescribed in version 5 of the scheme. The applicable parameter values will be set out in
Powerlink’s transmission determination. Powerlink’s MAR will be adjusted according to its
performance against these parameter values, as assessed by us, in accordance with the
scheme
the market impact component (MIC) annual performance target26 will be calculated in
accordance with Appendix C, and example 2 in Appendix F, of the scheme27
the network capability component (NCC) of version 5 of the scheme will apply to Powerlink.
In its revenue proposal, Powerlink must:
submit proposed values for the service component (SC) parameters28
submit data for its market impact component (MIC) for the preceding seven regulatory
years.29 Powerlink must submit a proposed value for a performance target, unplanned outage
event limit and dollar per dispatch interval incentive.30
submit a network capability incentive parameter action plan (NCIPAP).31
24
NER, cll. 6A.5.4(a)(5) and 6A.5.4(b)(5).
25
NER, cll. 6A.4.2(5) and 6A.14.1(1)(iii).
26
The market impact parameter is the number of dispatch intervals where an outage on the TNSP’s prescribed transmission
network results in a network outage constraint with a marginal value greater than $10/MWh. For more information, see: AER,
Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, Appendix C.
27
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 4.2(g) and
Appendix F.
28
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 3.2.
29
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 4.2(a).
30
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 4.2(b).
Framework and approach – Powerlink transmission determination 2022–27 10We will accept Powerlink’s proposed parameter values for the service, market impact and
network capability components if the proposed values comply with clauses 3.2, 4.2 and 5.2,
respectively, of version 5 of the STPIS.32
Version 5 of the STPIS can result in a maximum revenue increment or decrement of up to
3.75 per cent of the TNSP’s MAR.33
2.3 Reasons for AER’s position
Version 5 of the STPIS seeks to ensure that cost reductions do not result in deterioration of
service performance for customers. We consider application of version 5 of the STPIS will
provide appropriate incentives for Powerlink to:
provide greater transmission system reliability
improve and maintain the reliability of those elements of the transmission system that are
most important to determining spot prices
undertake relevant low cost projects to promote efficient levels of network capability from
existing assets.
Additional information on the service, market impact and network capability components of the
STPIS, as well as Powerlink’s request for a review of STPIS version 5, is provided below.
Additional information on STPIS components
Service component
The service component of the STPIS incentivises TNSPs to maintain and improve network
availability and reliability by measuring performance against certain parameters. Under this
component of the scheme, a TNSP can receive a revenue increment or decrement of up to
1.25 per cent of its MAR for the relevant calendar year.34
A TNSP receives a financial incentive (reward) in proportion to the extent its annual performance
exceeds its performance target (calculated as the s-factor). If the TNSP fails to meet its
performance target, it incurs a financial penalty in proportion to the extent its annual performance
does not meet the performance target.
Version 5 of the STPIS amended the service component parameters to focus more on unplanned
outages, including a new parameter focusing on proper operation of equipment. Performance
against these parameters can be used as a lead indicator of a deterioration of network
reliability.35
The scheme contains definitions for each parameter. The definitions specify the applicable
sub-parameters, unit of measure, source of performance data, the formula for measuring
31
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 5.2(b).
32
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015.
33
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015. Calculated as
Service Component: max +/-1.25% MAR, Market Impact Component: max +/-1.00% MAR, and Network Capability Component:
max +/-1.5% MAR, MAR, max decrement depends on allowance and number of projects not completed and their project range
as per cll. 5.3(b)-(c).
34
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 3.3(a).
35
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, pp. 7–8.
Framework and approach – Powerlink transmission determination 2022–27 11performance, definitions of relevant terms, inclusions (which specify particular equipment or
events which are to be measured) and exclusions.
We will assess whether Powerlink’s proposed performance targets, caps and weightings comply
with STPIS version 5 requirements.36 We must accept Powerlink’s proposed parameter values if
they comply with the requirements of the STPIS.37 We may reject them if they are inconsistent
with the objectives of the STPIS.38
Market impact component
The market impact component will be applied to Powerlink to incentivise it to minimise the impact
of its transmission outages that can affect NEM outcomes. In this component, Powerlink will
receive a financial incentive which falls within a range of -1 per cent (penalty) and +1 per cent
(reward) of its MAR.39
We will assess Powerlink’s proposed parameter values using the methodology set out in
section 4, Appendix C and Appendix F of version 5 of the STPIS.
Network capability component
The network capability component will be applied to Powerlink to incentivise the identification and
implementation of low cost one-off projects that will improve the capability of the transmission
network at times most needed. AEMO will play a part in prioritising the projects to deliver best
value for money for customers. In this component, Powerlink will receive an annual allowance of
up to a total of +1.5 per cent of its MAR, but we may reduce the final payment where priority
projects are not achieved.40
We will assess Powerlink’s NCIPAP in accordance with section 5.2 of version 5 of the STPIS.
Powerlink’s request for a review of the market impact component of the STPIS
The market impact component (MIC) provides incentives to TNSPs to manage network
congestion and the timing of planned outages to minimise the impact of planned outages on the
electricity spot market.
Powerlink submitted that it has experienced a significant increase in its MIC count due to
constraints being applied to manage changed power flow direction and system strength issues
associated with the connection of renewable generation on its network.
We reviewed the data and information submitted by Powerlink. We consider that the Scheme is
operating appropriately, whereby the congestion in this period results in an increased MIC and
associated financial penalty. The MIC target for the next regulatory control period captures the
performance in this period. We understand that capital works or changes in network
management to decrease congestion are being undertaken. These inputs will potentially result in
a fall in the MIC and yield an associated financial gain.
Further, Powerlink has been directed by AEMO to provide additional system strength in 2021.
The additional system strength will further reduce the pressure on network constraints.
36
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 3.1.
37
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 3.2(a).
38
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 3.2(l).
39
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cl. 4.3.
40
AER, Transmission network service target performance incentive scheme, version 5 (corrected), October 2015, cll. 5.3(b)–(c).
Framework and approach – Powerlink transmission determination 2022–27 12We consider that, given the expected change in the system strength in 2021 and a number of
improvement projects completed, underway or planned, the current network congestion issue will
be substantially addressed by 2021.
The expected implementation of the Coordination of Generation and Transmission Investment
(COGATI), the AEMC’s Investigation into system strength frameworks in the NEM, and the
Energy Security Board’s (ESB) post-2025 Market Design will radically change the operation of
the NEM, hence the operation of the STPIS. In addition, we have received feedback from
stakeholders requesting us to review broadly how the incentive regime operates, and its
effectiveness (with a focus on the major schemes, EBSS, STPIS and CESS). We are considering
the scope and timing of this work within our work priorities, and believe further stakeholder
consultation is required. Given this, we do not consider that a review of the MIC component of
the STPIS is required at this time.
3 Efficiency benefit sharing scheme
The EBSS is intended to provide a continuous incentive for transmission businesses to pursue
efficiency improvements in opex, and provide for a fair sharing of these between businesses and
consumers. Consumers benefit from improved efficiencies through lower network prices in future
regulatory control periods.
We address our position on the application of the EBSS in relationship to our proposed opex
forecasting approach and benchmarking below. We also explain the rationale underpinning the
scheme.
3.1 AER’s position
We intend to apply the EBSS to Powerlink in the 2022–27 regulatory control period if we are
satisfied the scheme will fairly share efficiency gains and losses between the business and
consumers.41 This will occur only if the opex forecast for the following period is based on the
businesses revealed costs. Our transmission determination for Powerlink for the 2022–27
regulatory control period will specify if and how we will apply the EBSS.42
3.2 AER’s assessment approach
The EBSS must provide for a fair sharing of opex efficiency gains and efficiency losses between
a network service provider and network users.43 We must also have regard to the following
factors in developing and implementing the EBSS:44
the need to ensure that benefits to electricity consumers likely to result from the scheme are
sufficient to warrant any reward or penalty under the scheme
the need to provide service providers with a continuous incentive to reduce opex
41
NER, cl. 6A.6.5(a).
42
AER, Efficiency benefit sharing scheme, 29 November 2013.
43
NER, cl. 6A.6.5(a).
44
NER, cl. 6A.6.5(b).
Framework and approach – Powerlink transmission determination 2022–27 13 the desirability of both rewarding service providers for efficiency gains and penalising service
providers for efficiency losses
any incentives that service providers may have to capitalise expenditure
the possible effects of the scheme on incentives for the implementation of non-network
alternatives.
3.3 Reasons for AER’s position
The EBSS applies to Powerlink in the 2017–22 (current) regulatory control period.
The decision to apply the EBSS will depend on whether we expect to use Powerlink’s revealed
costs in the 2022–27 period to forecast opex in the 2027–32 period.
Why we would apply the EBSS
We will only apply the EBSS in the 2022–27 regulatory control period if we expect we will use a
revealed cost forecasting approach to forecast opex for the 2027–32 period.
The EBSS is intrinsically linked to our revealed cost forecasting approach. This approach relies
on identifying an efficient opex amount in the base year (the ‘revealed costs’ of the transmission
business), which we use to develop a total opex forecast. When a business makes an
incremental efficiency gain, it receives a reward through the EBSS, and consumers benefit
through a lower revealed cost forecast for the subsequent period. This is how efficiency
improvements are shared between consumers and the business.
Under a revealed cost approach without an EBSS, a transmission business has an incentive to
spend more opex in the expected base year. Also, a transmission business has less incentive to
reduce opex towards the end of the regulatory control period, where the benefit of any efficiency
gain is retained for less time.
If we use a revealed cost forecasting approach, we apply the EBSS because:
it reduces the incentive for a transmission business to inflate opex in the expected base year
in order to gain a higher opex forecast for the next regulatory control period
it provides a continuous incentive for a transmission business to pursue efficiency
improvements across the regulatory control period. This is because the EBSS allows a
business to retain efficiency gains for a total of six years, regardless of the year in which it
was made.
In implementing the EBSS, we also consider any incentives a transmission business may have to
capitalise opex.45 Where opex incentives are balanced with capex incentives, a transmission
business does not have an incentive to favour opex over capex, or vice-versa. If the CESS and
EBSS are both applied, these incentives will be relatively balanced. We discuss the CESS further
in section 4.
Why we would not apply the EBSS
We will not apply the EBSS if it is likely we will not use a revealed cost forecasting approach to
forecast opex for the 2027–32 regulatory control period.
45
NER, cl. 6A.6.5(b)(3).
Framework and approach – Powerlink transmission determination 2022–27 14If we apply the EBSS but do not forecast opex using revealed costs, a transmission business
could in theory receive an EBSS reward for efficiency gains (at a cost to consumers), but
consumers would not benefit through a lower revealed cost forecast. If the transmission business
expects this, it has an incentive to increase its EBSS carryover by reducing opex in its base year,
knowing will not reduce its opex forecast.46 Consumers would pay the EBSS reward, but not
receive a share of the underspend and would be worse off. This outcome is contrary to the NER,
which requires that the EBSS must provide for a fair sharing of efficiency gains and losses
between a transmission business and consumers.47
If a transmission business’s revealed costs in the 2017–22 regulatory control period are
materially higher than the opex incurred by a benchmark efficient transmission business, we will
be unlikely to use revealed costs to forecast opex for the 2022–27 period. In which case, we will
be unlikely to apply the EBSS. Where we allow forecast opex that is materially lower than
revealed costs, even in the absence of the EBSS the TNSP would have an incentive to reduce
opex and therefore may have an incentive to capitalise expenditure it would have previously
expensed. Given these incentives to reduce opex (and therefore to substitute opex with capex),
we consider that applying the CESS would likely provide more balanced incentives between
incurring capex and opex than not applying the CESS.48
Appendix A of the explanatory statement to the EBSS provides a detailed example of how the
EBSS works with a revealed cost forecasting approach.49
4 Capital expenditure sharing scheme
The CESS provides financial rewards to TNSPs whose capex becomes more efficient, and
financial penalties for TNSPs whose capex becomes less efficient. Consumers benefit from
improved efficiency through lower regulated prices. The CESS approximates efficiency gains and
efficiency losses by calculating the difference between forecast and actual capex. It shares these
gains or losses between TNSPs and network users.
The CESS works as follows:
we calculate the cumulative underspend or overspend for the current regulatory control period
in net present value terms
we apply the sharing ratio of 30 per cent to the cumulative underspend or overspend to work
out the TNSP’s share of the underspend or overspend
CESS payments are calculated taking into account the financing benefit or cost to the TNSP
of the underspend or overspend.50 Further adjustments can also be made to account for
deferral of capex and ex post exclusions of capex from the RAB
46
In our explanatory statement to the EBSS, we detail why excluding the expenditure categories not forecast using a single year
revealed cost forecasting method is in the best interest of network users. AER, Explanatory statement - efficiency benefit sharing
scheme, November 2013, pp. 18–19.
47
NER, cl.6A.6.5(a).
48
For example, we chose to apply the CESS and not the EBSS to Northern Territory electricity distributor, Power and Water in its
2019–24 distribution determination. https://www.aer.gov.au/networks-pipelines/determinations-access-arrangements/power-and-
water-corporation-determination-2019-24/draft-decision.
49
AER, Explanatory statement – Efficiency benefit sharing scheme, November 2013, pp. 25–26.
https://www.aer.gov.au/system/files/AERexplanatorystatement-efficiencybenefitsharingschemeNovember2013.docx.
50
We calculate benefits as the benefits to the TNSP of financing the underspend since the amount of the underspend can be put to
some other income generating use during the period. Losses are similarly calculated as the financing cost to the TNSP of the
overspend.
Framework and approach – Powerlink transmission determination 2022–27 15 CESS payments are added or subtracted to the TNSP’s regulated revenue as a separate
building block in the next regulatory control period.
Under the CESS, a TNSP retains 30 per cent of an underspend or overspend, while consumers
retain the other 70 per cent. This means that for every one dollar saving in capex, the TNSP
keeps 30 cents while consumers gain 70 cents.
4.1 AER’s position
The CESS applies to Powerlink in the 2017–22 (current) regulatory control period. Our position is
to continue to apply the CESS, as set out in our capex incentives guideline, to Powerlink in the
2022–27 period.51 We consider this will contribute to the capex incentive objective.52
4.2 AER’s assessment approach
In deciding whether to apply the CESS to a TNSP, including the nature and details of the applied
CESS, we must:53
make that decision in a manner that contributes to the capex incentive objective54
consider the CESS principles,55 capex objectives,56 other incentive schemes, and (where
relevant) the opex objectives, as they apply to the particular TNSP, and the circumstances of
the TNSP.
Broadly, the capex incentive objective is to ensure that only capex that meets the capex criteria
enters the RAB (where the RAB is used to set prices). Consumers, therefore, only fund capex
that is efficient and prudent.
4.3 Reasons for AER’s position
In developing the CESS, we took into account the capex incentive objective, capex criteria,
capex objectives and the CESS principles. The CESS is designed to work alongside other
incentive schemes that apply to TNSPs, including the EBSS and STPIS.
If a TNSP spends less than its approved forecast capex during a regulatory control period, that
TNSP will benefit within that regulatory control period. At the end of the regulatory control period,
the TNSP’s RAB will be updated to include new capex. The RAB will include a lower capex
amount than would be the case if the TNSP had spent the full forecast capex amount. This is
where any sharing of capex underspends (or overspends) with consumers occurs. Thus
consumers will also benefit from a capex underspend, but this will occur at the end of the
regulatory control period as the result of lower future prices.
As the end of the regulatory control period approaches, the time available for the TNSP to retain
any savings gets shorter. The earlier in the regulatory control period a TNSP incurs an
51
AER, Capital expenditure incentive guideline for electricity network service providers, November 2013, pp. 5–9.
52
NER, cll. 6A.5A(a) and 6A.6.7(c).
53
NER, cl. 6A.6.5A.
54
NER, cll. 6A.5A(a) and 6A.6.7(c)(1)–(3).
55
NER, cl. 6A.6.5A(c).
56
NER, cl. 6A.6.7(a).
Framework and approach – Powerlink transmission determination 2022–27 16underspend, the greater is its reward. Without a CESS, the TNSP may choose to spend earlier
on capex, spend less on capex (at the expense of service quality), or displace opex with capex.
The TNSP may make these choices when it is not efficient to do so. The CESS maintains the
TNSP’s incentive to spend less than its forecast capex as the TNSP approaches the end of its
regulatory period.
The CESS means the TNSP faces the same reward and penalty for capex underspends or
overspends in every year of the regulatory control period. The CESS provides TNSPs with an ex
ante incentive to spend only efficient capex. TNSPs that make efficiency gains will be rewarded
through the CESS. Conversely, TNSPs that make efficiency losses will be penalised through the
CESS. In this way, TNSPs will be more likely to incur only efficient capex when subject to a
CESS, increasing the likelihood that capex included in the TNSP’s RAB reflects the capex
criteria. Specifically, if a TNSP is subject to the CESS, its capex is more likely to be efficient and
to reflect the costs of a prudent TNSP.
When the CESS, EBSS and STPIS apply to a TNSP the incentives for improvements in opex,
capex and service outcomes are balanced. This encourages businesses to make efficient
decisions concerning when and what type of expenditure to incur. Businesses are incentivised to
efficiently balance expenditure reductions against service quality and reliability.
5 Small-scale incentive scheme
The NER provide that we may develop a SSIS.57 As noted earlier, on 21 July 2020, we published
an electricity distribution small-scale incentive scheme for customer service, referred to as the
CSIS.58 The scheme would reward electricity DNSPs for improving their customer service, or
penalise them if service deteriorates. We consider that this could improve the incentives available
for DNSPs to recognise the value of customer service.
The relationship between TNSPs and their customers may be different to the relationship DNSPs
have with their customers. As such, the development of a transmission CSIS warrants its own,
separate consultation. We note Powerlink has not proposed a detailed incentive scheme design
developed in conjunction with its customers. As such, we do not propose to apply a SSIS to
Powerlink for the 2022–27 period.
6 Demand management incentive scheme /
innovation allowance mechanism
On 1 March 2019, the ENA submitted a rule change request to the AEMC proposing
amendments to the NER that would require the AER to develop a demand management
incentive scheme (DMIS) and a demand management innovation allowance mechanism
(DMIAM) to apply to TNSPs.59 On 5 December 2019, the AEMC published a final rule
determination to apply the DMIAM – but not the DMIS – to TNSPs.60
57
NER, cl. 6A.7.5.
58
AER, Explanatory statement – customer service incentive scheme, 21 July 2020.
59
AEMC, Demand management incentive scheme and innovation allowance for TNSPs, Rule determination, December 2019.
60
AEMC, Demand management incentive scheme and innovation allowance for TNSPs, Rule determination, December 2019.
Framework and approach – Powerlink transmission determination 2022–27 17Introducing a DMIAM for transmission is expected to encourage transmission businesses to
expand and share their knowledge and understanding of innovative demand management
projects that may reduce long term network costs and, consequently, lower prices for consumers.
The AEMC was not satisfied that the benefits of applying the DMIS to transmission businesses
would outweigh the upfront costs to consumers.61
The AER must develop and publish, by 31 March 2021, the first transmission DMIAM required
under new clause 6A.7.6.62 The development of a DMIAM guideline will involve a process of
consultation with our stakeholders.63 Due to the COVID-19 interruption, we expect to finalise the
transmission DMIAM by 30 June 2021 following stakeholder consultation on a draft guideline.64
We acknowledge that the transmission DMIAM will be finalised on a date that is around five
months after Powerlink submits its 2022–27 initial revenue proposal to us. Powerlink will have an
opportunity to fully reflect the finalised transmission DMIAM in its revised revenue proposal which
will be due around November 2021. At this stage, we expect to apply a DMIAM to Powerlink for
the 2022–27 period in our final determination.
7 Expenditure forecast assessment guideline
The expenditure forecast assessment guideline (guideline) sets out our expenditure forecast
assessment approach as developed, and consulted upon, during the Better Regulation
program.65 It outlines the assessment techniques we will use to assess a transmission business’s
proposed expenditure forecasts, and the information we require from the business. This section
sets out our intention to apply the guideline to Powerlink for the 2022−27 regulatory control
period.
The guideline uses a nationally consistent reporting framework that allows us to compare the
relative efficiencies of transmission businesses and decide on efficient expenditure forecasts.
The NER require Powerlink to advise us of the methodology it proposes to use to prepare its
forecasts by 30 June 2020.66
The F&A must set out our proposed approach to application of the guideline.67 This will provide
Powerlink with clarity regarding the information it should include in its revenue proposal. This
contributes to an open and transparent process and makes our assessment of expenditure
forecasts more predictable.
The guideline contains a suite of assessment/analytical tools and techniques to assist our review
of the expenditure forecasts that transmission businesses include in their regulatory proposals.
We intend to have regard to the assessment tools set out in the guideline. The tool kit includes:
61
AEMC, Demand management incentive scheme and innovation allowance for TNSPs, Rule determination, December 2019.
62
AEMC, Demand management incentive scheme and innovation allowance for TNSPs, Rule determination, December 2019, NER
cl. 11.118.2.
63
The AER is required to follow the transmission consultation procedures in making, developing or amending guidelines, models or
schemes or in reviewing methodologies. These procedures are set out in Part H of Chapter 6A of the NER, cl. 6A.20.
64
As indicated in the, Joint market body prioritisation framework – COVID 19, released by the AER, AEMC and AEMO on
19 May 2020, https://www.aer.gov.au/publications/corporate-documents/joint-market-body-prioritisation-framework-covid-19.
65
We were required to develop the EFA guideline under clauses 6.4.5 and 11.53.4 of the NER. We published the guideline on 29
November 2013. It can be located at https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-
reviews/expenditure-forecast-assessment-guideline-2013.
66
NER, cl. 6A.10.1B. Powerlink’s submitted expenditure forecasting methodology has been published on the AER’s website.
67
NER, cl. 6A.10.1A(b)(5).
Framework and approach – Powerlink transmission determination 2022–27 18 models for assessing proposed replacement and augmentation capex
benchmarking (including broad economic techniques and more specific analysis of
expenditure categories)
methodology, governance and policy reviews
predictive modelling and trend analysis
cost benefit analysis and detailed project reviews.68
We exercise judgement to determine the extent to which we use a particular technique to assess
a regulatory proposal. We use the techniques we consider appropriate depending on the specific
circumstances of the determination. The guideline is flexible and recognises that we may employ
a range of different estimating techniques to assess an expenditure forecast. As such, some
customisation of the data requirements contained in the guideline might be required. While we do
not anticipate any such requirements at present, any data customisation issues would be
addressed through the regulatory information notice (RIN) that we will issue to Powerlink for the
next regulatory control period.
8 Depreciation
This section sets out our proposed approach to calculating depreciation when the RAB is rolled
forward to the commencement of the 2027–32 regulatory control period.
As part of the roll forward methodology, when the RAB is updated from forecast capex to actual
capex at the end of a regulatory control period, it is also adjusted for depreciation. The
depreciation we use to roll forward the RAB can be based on either:
actual capex incurred during the regulatory control period (actual depreciation). We roll
forward the RAB based on actual capex less the depreciation on the actual capex incurred by
the TNSP; or
the capex allowance forecast at the start of the regulatory control period (forecast
depreciation). We roll forward the RAB based on actual capex less the depreciation on the
forecast capex approved for the regulatory control period.
The choice of depreciation approach is one part of the overall capex incentive framework.
Where a CESS is applied, using forecast depreciation maintains the incentives for TNSPs to
pursue capex efficiencies, whereas using actual depreciation would increase these incentives.
There is more information on depreciation as part of the overall capex incentive framework in our
capex incentives guideline.69 In summary:
if there is a capex overspend, actual depreciation will be higher than forecast depreciation.
This means that the RAB will increase by a lesser amount than if forecast depreciation were
used. So, the TNSP will earn less revenue into the future (i.e. it will bear more of the cost of
the overspend into the future) than if forecast depreciation had been used to roll forward the
RAB
if there is a capex underspend, actual depreciation will be lower than forecast depreciation.
This means that the RAB will increase by a greater amount than if forecast depreciation were
68
AER, Explanatory statement: Expenditure assessment guideline for electricity transmission and distribution, 29 November 2013.
69
AER, Capital expenditure incentive guideline for electricity network service providers, November 2013, pp. 11–12.
Framework and approach – Powerlink transmission determination 2022–27 19used. Hence, the TNSP will earn greater revenue into the future (i.e. it will retain more of the
benefit of an underspend into the future) than if forecast depreciation had been used to roll
forward the RAB.
The incentive from using actual depreciation to roll forward the RAB also varies with the life of the
asset. Using actual depreciation will provide a stronger incentive for the TNSP to underspend
capex on shorter lived assets compared to longer lived assets as this will lead to a relatively
larger increase in the RAB. Use of forecast depreciation, on the other hand, leads to the same
incentive for capex regardless of asset lives. This is because using forecast depreciation does
not affect the TNSP's incentive on capex as the TNSP does not lose the full cost of any
overspend and is not able to keep all the benefits of any underspend. To this end, using forecast
depreciation means the capex incentive is focussed on the return on capital.
8.1 AER position
Our position is to use the forecast depreciation approach to establish the RAB at the
commencement of the 2027–32 regulatory control period for Powerlink.
8.2 AER’s assessment approach
We must set out our proposed approach as to whether we will use actual or forecast depreciation
to establish a TNSP’s RAB at the commencement of the following regulatory control period.70 Our
decision must be consistent with the capex incentive objective.71 We must have regard to:72
any other incentives the service provider has to undertake efficient capex
substitution possibilities between assets with different lives
the extent of overspending and inefficient overspending relative to the allowed forecast
the capex incentive guideline
the capital expenditure factors.
Our approach is to apply forecast depreciation except where:
there is no CESS in place and therefore the power of the capex incentive may need to be
strengthened, or
a TNSP’s past capex performance demonstrates evidence of persistent overspending or
inefficiency, thus requiring a higher powered incentive.
In making our decision on whether to use actual depreciation in either of these circumstances we
will consider:
the substitutability between capex and opex and the balance of incentives between these
the balance of incentives with service outcomes
the substitutability of assets of different asset lives.
70
NER, cll S6A.2.2B and 6A.5A(b)(3).
71
NER, cl S6A.2.2B(b).
72
NER, cl S6A.2.2B.
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